Good day, and welcome to the Cairn 2014 First Half Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jean Francois Palou, General Manager. Please go ahead, sir.
Good evening to all of you. I'm Jean Francois Pallu, Kering Group Managing Director, and I'm pleased to welcome you to call. I will give you a brief overview of our first half twenty fourteen results and Jean Marc Duplex, our CFO, will run you through our numbers in greater detail. And before we answer any questions you may have on our performance in the first half, I'll share with you our views on where we stand as we enter the second half of the year as well as some background on the acquisition announcement we also made this evening. Let's go directly to slide 4, where we have summarized our key readings on the first half.
In the middle of a major brand repositioning exercise at Gucci and a route and branch turnaround at Puma, 2 of our largest units, Kering achieved a 4% increase in comparable sales, improved gross margin by more than 1 percentage point and maintained a higher level of operating profitability despite unfavorable currency trends. I would like to point out here that adjusted for currency changes, our EBIT growth was far ahead of the increase in sales with a material increase in margin at each of our luxury brands at constant currency. These performances underscore the soundness of the strategy we have been implementing for over a decade as we built an ensemble of complementary brands with different levels of maturity. The outstanding performances of our high growth luxury brands notably Bottega Veneta and Saint Laurent more than compensated for the softer momentum at Gucci in the period as we raised the exclusivity of the brand in terms of both product offering luxury operations is a telling number. The further increase in operating profit of our luxury activities in the face of considerable investments in our brand's positioning and future growth is another testimony to their inherent strength.
In Sport and Lifetime, we are seeing the first positive signs of Puma's turnaround at the top line level and now other brands
are
second half, we are confident that these trends will solidify. The order books Puma is building for the coming quarters comfort our expectations. Operating profitability of the sport and lifestyle activities was severely impacted by the adverse foreign currency environment exacerbating the impact of our investments in its future. Around half of the operating income decrease is attributable to negative currency effect. Finally, the first half of twenty fourteen marks the definitive chapter into a pure luxury and sport and lifestyle company.
Our discontinued operations numbers and the group's net income show the impact of this move. But this is it. We do not expect any further material impact on our numbers from our move away from retail businesses. And we can now focus all our attention and all our energies on the prosperity of our core activities. We are thankful for the support
a
introduction to Jean Marc's drill down of our first half profitability generated by our high growth brands. And in the meantime, while undergoing an in-depth an we consider these performances promising. Our high growth brands are delivering according to plan indeed better than plan and we are seeing very encouraging signs in the activities we are repositioning for the future. I will now pass the phone to Jean Marc for a comprehensive review of the first half numbers.
Thank you, Jean Francois, and good evening to all of you. All the sales figures and comments I will make are based on comparable scope and exchange rates. As a reminder, Pomerato Group was consolidated as of July 1, 2013. Let me start with our performance in Luxury on Slide 7. In the first half, Kering's luxury activities posted an increase in sales of nearly 6% driven by solid retail revenues up 10%.
This is slightly higher than the retail trends achieved in either the first or the second half of last year. The pace of growth in retail slowed down in the Q2 to 7%. This deceleration is mostly attributable to the reversion of VAT hike anticipation in Japan. So looking at the underlying trend of the first half rather than at the quarters probably makes more sense than ever this year. You will also notice that the growth in retail of our activities has been extremely consistent over the past 18 By region, mature markets were solid contributors to growth in the first half, up 11% in retail.
This was driven by strong trends in Japan, up 20% over the period and by North America, up 12%. North America picked up in the 2nd quarter after the tough weather conditions of the Q1. Conversely, retail sales in Japan were up 2% in the 2nd quarter after an upbeat Q1 for the VAT reason you know. Growth in retail sales was only marginally lower in emerging markets, up 9% in the first half. I'll come back on this in more details in a few minutes when commenting on each brand.
As far as wholesale is concerned, the 3% decrease once again reflects our strategic move toward increased direct distribution particularly at Gucci as I will elaborate later. Overall for our luxury activities, the share of retail is 69% of the total in the first half of twenty fourteen as compared to 67% in the comparable period last year. In the first half, Kering's luxury activities posted another increase in operating profit, up 1% reported and up 9% in constant currency. This improvement is driven by the increased contribution of Bottega Veneta, Saint Laurent and our other brands with a combined EBIT up 16% to 2 €71,000,000 in the first half. Together, they now represent more than 1 third of the EBIT of our luxury activities.
Following a year of strong investments in 2013, we have reached a comfortable CapEx level, allowing us to fully nurture each brand's development and to prioritize our investments where they are most effective. So our investments account for the bulk of our CapEx around 75% of the total. They are well balanced between store openings on the one hand, expansion and refurbishments on the other. The luxury activities added a net of 20 directly operated stores in the first half with 55 openings and 35 closings. This illustrates our commitment to constantly fine tune network and to concentrate on the best locations.
At the
end of June, the total store count was 169. Let's look at Gucci on Slide 8. Over the first half, Gucci posted a satisfactory retail performance, up 3%. This reflects contrasted market situations depending on the stage of implementation of our brand strategy as well as on diverging macro trends. By region, first half retail sales were very dynamic in both Japan and North America, 7%.
As expected, Japan decelerated following VAT purchase anticipation in late March, resulting in flat sales in the Q2. By contrast, retail in North America at plus 10% in the Q2 accelerated materially after a Q1 affected by the weather. Retail performances in Western Europe remained soft with mixed trends in local spending together with some pressure on tourism flow from Russia, but also China. In Asia Pacific, the challenging environment of the first half, especially in Hong Kong, Singapore and Taiwan came on top of the brand elevation implementation. In Mainland China, trends in the Q2 were similar to the Q1 and Hong Kong was soft as we had already stated previously.
Singapore for its spot further deteriorated leading the sales declines in Southeast Asia. As expected, wholesale was down 16%, 1 6% in the first half reflecting Gucci's continuing shift towards direct controlled stores. The decline was less acute in the Q2, down 12%. Going forward, in the second half, this trend should gradually normalize excluding any additional buyback opportunities. In the first half, retail sales represented nearly 80 percent of Gucci revenues from just over 70 percent, if we look back to 2,009.
Distribution is one of the pillars of our Elevation strategy. Product assortment is another. To illustrate this point, I invite you to move to slide 9, which provides an overview of on where Gucci comes from and where the brand now stands with specific regard to the handbag category. Handbags account for 1 third of Gucci sales. You will see that entry price products now represent just 2% of the category revenue worldwide, down from 32% 5 years ago.
Handbags constitute the category in which we have made the most progress across all markets and where we are closest to where we want to drive the brand. The results are proving, especially in Japan, where the brand is fully in sync with its clientele and in North America where the brand ramp up is solidly on track. The concentration on core handbag segments explains the growth in revenue, partially driven by average unit retail price over the period. Thanks to new lines like Swing and Bright Diamante Gucci's most recent launch that you will see later on Slide 10, we are steadily expanding the offer in this cost segment, enlarging the carryover base in no logo level lines. The new series have been very well received and we expect them to become significant contributors to revenue growth.
Combined with our ongoing efforts to further enhance our retail excellence across the network, these new handbags will definitely strengthen Gauche's competitive position when end demand and traffic notably in Asia pick up strength again. In other level goods categories, we have not yet reached the same level of brand elevation. This is the case in luggage, for example, but also in small leather goods where Gucci proposes an opportunity for more aspirational clients to access the brand. In the first half, Gucci posted another increase in gross margin driven by both product and channel mix improvements. Part of this additional contribution was selectively reinvested while we maintain stringent discipline in key areas such as store expenses.
Consequently, Gucci's EBIT margin was now in line with the first half of twenty thirteen and was even slightly ahead of last year at constant currency. This is an achievement and demonstrates Gucci's ability to actively manage its cost base while implementing a virtuous upscaling of its product positioning. As of June 30, Gucci operated 480 stores. Operating investments were broadly stable compared to last year with enlargements and relocations to consolidate and enhance the overall in store experience across the network. Moving to slide 11, Bottega Veneta posted another semester of sustained growth accelerating in the Q2, up 20%, with further growth in the mid teens in retail broadly aligned with the trend of the past few quarters.
Wholesale was also outstanding in Q2 posting growth in excess of 40 5%. This performance reflects both strong demand for the fallwinter 2014 2016 collections from key buyers and a more efficient production and delivery flow further highlighting the brand's ongoing commitment to best in class operations. By region, all main markets witnessed double digit growth in retail throughout the first half. Looking to the Q2 alone, retail performances remained extremely positive in Japan, up a solid 9% after an increase of 42% in the previous quarter. Other mature markets accelerated during the Q2 with North America fueled by solid growth of both local and tourist clients.
In Asia Pacific, retail sales growth in the high teens was consistent in both quarters. All main product categories enjoyed very sound growth. Leather Goods maintained steady momentum during both Q1 and Q2 while other categories posted firm increases in sales led notably by men's lines. The solid top line performance of the first half resulted in further double digit growth in EBIT. Bottega Veneta's reported EBIT margin remained at a very high 31%, 50 basis points lower than in H1 last year.
The slight dilution will not come as a surprise to given the high level of operating investments in store openings and new product categories in order to support Bottega Veneta's long term strategic ambitions. Let's now quickly comment on operating investments just to remind you that the headline CapEx decrease primarily stems from a very high comparison base. In H1 'thirteen, Bottega Veneta's CapEx had tripled given preparations for the opening of the Montebello Vicentino Atelier and Milano Maisons, both of which opened in H2 last year. Leaving this factor aside, Bottega Veneta's investment program in the first half this year was again sustained. Six stores were opened in the period of which 4 in Western Europe where the brand still has a largely untapped potential bringing the aggregate store count to 227 units as of June 30th.
Flipping over to slide 12, let's now look at Saint Laurent's performance in the first half, a period during which sales jumped by 28%. Retail sales were outstanding showing growth of 56%. Trends in the 6 months confirm that the significant retail investments of the past year both in terms of store openings and refurbishments are paying off. As a consequence, retail sales represented 62% of the brand's sales during the period more than 10 percentage points above last year. Wholesale for its part was roughly flat in the first half.
This reflects the different timing of deliveries of the cruise and springsummer collections this year compared to last year. Using that aside, wholesale registered solid double digit growth in the Q2 better indicating the brand's momentum with buyers. Briefly commenting on retail sales by region, Saint Laurent posted extremely solid growth rates across the board with all main markets posting high double digit sales performances in both quarters alike. This confirms once again how strongly Saint Laurent's renewal is resonating, be it in Western Europe, its main and historical market or newer markets such as Asia Pacific where the brand's potential is extremely promising. All product categories enjoyed very solid growth fueled once again by the success of some of the handbag lines introduced over the past 12 months or so such as Cirque du Jour and monogram.
The monogram lines in particular were enriched in the 2nd quarter by the introduction of additional shapes and functions all of which were very well received. Sales of ready to wear grew solidly in excess of 40% in retail further propelled by the significant investments carried out in the men's line. In the first half, Saint Laurent's operating profit rose in excess of 50% translating into a further 200 basis point improvement in the brand's EBIT margin. This sharp jump in profitability is driven by further gross margin gains as Saint Laurent tightens its control of a distribution and improves its share of full price sales. It also comes from a positive operating leverage now that the Couture business has reached a greater scale.
Considering the momentum of the brand, the overall CapEx budget has been kept at a high level above 7% of sales reflecting the selective expansion of the retail network with 9 openings and 7 closures in the first half. The sizable part of the retail store CapEx was also devoted to refurbishments in line with the plan to upgrade the retail network initiated last year. Moving on to slide 13, our other luxury brands, altogether posted revenue growth of close to 7% in the half year driven by retail sales up 12%. In line with earlier periods, trends in soft luxury benefited from the outstanding performances of Alexander McQueen and Stella McCartney further confirmed in the Q2 up double digit. Sales at Balenciaga were especially sustained in retail showing some acceleration in the Q2 as all key regions saw double digit retail growth with North America leading the way.
Reunioni for its part had a very satisfactory retail performance in Japan and North America. This was partly offset by the brand's exposure to the Russian clientele, which dragged down Western and Eastern Europe revenues. In and second quarters. At Boucheron for instance, the very solid first quarter was partially reversed in the 2nd quarter in Japan, the brand's 2nd largest market due to important anticipations of bridal jewel repurchases ahead of April 1. Pomellato and Dodo enjoyed positive trends in the first half.
This was achieved at times where both brands have been enhancing their product offer and distribution while proving resilient in Western Europe together we sales in the first half even if the change in distribution in Asia Pacific requires some time to reach cruising speed. In the first half, operating profit of our other luxury brands grew by 12% with satisfactory Christopher Kane and Kylie. Conversely, the results of Gerard Perrigo were impacted by some charges related to the transition in its distribution, whereas Cerro's results were not aligned with our expectations. In summary, let me remind you that Kering is actively managing a multi brand portfolio strategy based on the constant pursuit of profitable growth with targeted investments adapted to each brand's life cycle within a broadly stable CapEx budget. With slide 14, let's move on to Sport and Lifestyle, which demonstrated a more promising sales performance during the first half with encouraging signs in the order books ahead of Puma's brand relaunch.
I will not elaborate on Puma following its announcement yesterday, just recapping the main takeaways of the first half. Over the period, Puma's revenues stabilized with improved and positive revenue growth during the Q2, up nearly 1%. By distribution channel, while wholesale sales were essentially flat in the 1st and second quarters alike, retail revenues picked up materially with good levels of growth also on a like for like basis in Q2. By geography, sales remain contrasted. North America enjoyed solid trends accelerating in the 2nd quarter up 4% driven by apparel and accessories.
Brand awareness in this market benefited from the Puma Labs at Foot Locker initiative launched in Q1. In contrast, Western Europe remained slightly negative with good performances in the UK and Spain not setting softer trading notably in France. Emerging markets accounting for nearly 37% of Puma's sales achieved positive sales in the Q2 lifted by Latin America, Turkey and Asia Pacific excluding Japan, partly mitigated by lower sales in Eastern Europe. Trends by product category did not change materially in the first half. While footwear sales remained negative, accessories and apparel continued to drive growth.
Overall, Puma sales performance in the first half further reinforces our confidence that the brand is gradually regaining traction notably thanks to its renewed focus on sports and performance. For instance, all the product initiatives around football with the launch of highly innovative boots earlier in the year such as EvoPower helped generate strong brand visibility during the World Cup. This is providing a solid platform ahead of the Arsenal kit launch in July and for ever faster advertising campaign due this August in time for the back to school season. As these initiatives gain momentum and the order books for the full winter 2014 season due to be shipped during Q3 we are convinced that Puma's turnaround is well on track. Our other sport and lifestyle brands also posted satisfactory revenue performances throughout the period.
At Vulcan, sales accelerated in the 2nd quarter, up nearly 6% supported by a solid retail channel. Wholesale revenues also improved, triggering further market share gains, particularly in North America. Electric had a good first half with a brand refocus on sunglasses and accessories such as watches now starting to pay off. Sport and Lifestyle operating income decreased in the period. This is a consequence of the very adverse top line impact from FX at Puma, leading to a weaker absorption of fixed costs along with the 1st incremental A and P investments to support Tuma's relaunch which will further accelerate in the second half.
A number of key financial indicators are clearly heading in the right direction. In particular, gross profit margin at Puma is stable in the first half with an improvement in the second quarter. Now moving on to the remaining lines of the P and L summarized here on slide 16. Other non recurring operating income and expenses amounted to a loss of €8,000,000 It encompasses an impairment charge on Volcom's goodwill. This non cash impact is compensated by a capital gain on the sale of a real estate asset in New York that was not dedicated to our retail operations.
We considered that the market value of this building had reached an interesting level for us to monetize it. Net financial charges amounted to €105,000,000 Within this, the cost of net financial debt was down slightly reflecting 2 opposite effects: an increase in average debt position during the first half more than compensated by the lower net cost of financing, thanks to active management of our debt profile and the recent issuance of new bonds bearing a much lower interest rate. The effective corporate tax rate amounted to 20.5% in the first half with a recurring tax rate of 18.3% broadly flat year on year. Just a word on net income. As anticipated, we posted an additional loss staining from discontinued operations for a total amount of €348,000,000 After this, you should not expect any more material impact on this line.
As of the end of June, this loss included the balance of the costs related to the disposal of LaRodut, namely the personal measures that we had committed to finance and the anticipation of the cost related to the disposal of 2 small remaining Red Cat assets, which should be completed by year end. Consolidated net income is up 5% with a slight decrease when adjusted from non recurring items and discontinued operations. Let's now have a quick look at slide 17, which highlights the evolution of our free cash flow from operations. Our free cash flow improved to more than €600,000,000 including the positive cash impact of the Rio Estate sale I mentioned. Looking at cash flow generation, it's slightly higher than last year at €1,000,000 Our CapEx has also been maintained at a level similar to last year representing a cash outflow of €215,000,000 in the first half.
We had started last year to refocus our actions plan on organic growth across most brands leading us to stabilize the size of the overall CapEx budget. This has a virtuous effect on free cash flow generation and will of course be a key driver to control OpEx growth. The main difference in cash generation comes from working capital with the improvement at Puma not compensating for higher cash used in luxury activities. This increase primarily reflects the full impact of the store network expansion of the past 12 months, especially across the fastest growing brands notably Saint Laurent and Bottega Veneta. Now on slide 18, you will find the change in our net financial position during the period.
In the first half, net financial debt increased compared to December last year. This is due to usual seasonality patterns including dividend payments in the first half, which this year represented a cash outflow of €500,000,000 The increase in net debt is essentially the consequence of the cash outflows stemming from the Red Cat's asset disposal, which as you know includes the balance of the recapitalization of La Rodut accounted for in the second half of last year as well as the full impact from the personnel measures previously announced. This ends my remarks. So let me now pass the phone back to Jean Francois before we take your questions.
Thank you, Jean Marc. Let's turn to Slide 20, where we have summarized our priorities and views for the balance of this year. In luxury, we believe that the tougher environment on the economic and currency fronts will continue to impact our performance. In this context, we are confident that Gucci will return to revenue growth in the second half and we anticipate further This is probably the right place to make an aside on the acquisition of Ulysse Nardin that we have announced today. While we have been clear that our absolute priority in Sport and Lifestyle is to turn around our existing brands and while we are satisfied with our build up our watches and jewelry division.
In this respect, Ulysse Nardin is a brand that has been on our ratings screens for many years and the opportunity has materialized very recently in an industry where the number of quality independent watchmakers is limited. Ulysse Nardin fits all the requisites we had identified both on a standalone basis and as a strategic asset that can become the keystone of our presence in the watches segment. Existing assets. Ulysse Nardin is a very strong brand anchored in the marine universe with a unique legacy dating back to 1846. It has consistently been one of the most innovative independent manufacturers in the industry.
The brand is a pioneer in the use of cutting edge technologies and advanced materials such as silicon in components. As such, Ulysse Nardin is self reliant for all components including movements and hair strings, thanks to in house production capacities, skills and know how built over time. It has a very consistent collection in the fastest growing price segments. That as part of the group, Ulysse Nardin will be able to generate significant synergies within a few years. The multiple we offered a little more than 13 times EBITDA is fair for a brand with such heritage, high profitability and growth prospects.
We are looking forward to welcoming Unis Norden as part of the group when the acquisition closes later this year. Following the acquisition of Ulysse Nardin, our net debt at year end should be closer to 2 times EBITDA, the upper limit we have set up for ourselves to be able to seize a unique opportunity of this kind. Now that our transformation is complete, deleveraging will once again become our top cash flow use. Turning back to Sport and Lifestyle, the next big milestone is the unveiling of Puma's Forever Faster campaign in August and the arrival of new products in stores, which will mark the brand's official relaunch. So to conclude, we are operating in a more difficult environment than the one we thought we would face at the beginning of year.
But we have the right strategy and we are nimble and fast. This should enable us regardless of the environment to improve our operating performances in the second half of the year. We are now ready to take your questions.
Thank Thomas Chauvet of Citigroup. Please go ahead.
Good evening. Thomas Chauvet from Citi. I have three questions please. The first one on the acquisition of Louis Nardin. Could you perhaps share with us some indication around the turnover?
The press industry sources suggest CHF250 1,000,000 of turnover 27,000 pieces a year. Is that a fair assumption? What is the high profitability for you? And how will you integrate this brand within the watch and jewelry division that you have recently created? In particular, how is it going to perhaps help Gerald Pergo, which seems to be struggling for some time?
The second question is on the comment you made Jean Francois about the acceleration in Gucci trend in the second half. Can you elaborate a little bit about what you're seeing in July? What indicators you have in the environment or company specific that give you confidence about return to a more acceptable growth rate of maybe 5%, 6% for Gucci from here? That would be very useful. And thirdly, in terms of the FX impact, it seems you've mitigated the FX impacts on profits well in the first half.
If we look at today's spot rates and a lower euro, how should we think about FX in the second half? Can you give us also the hedge rate for the yen and dollar? And just if I may add just for a housekeeping question on your cash flow on page 10. Can you just tell us what the big swing is with this other non cash income and expenses of $127,000,000 please? Thank you.
Good evening, Toman. About Ilis Nardin, we didn't disclose the turnover and we will not. But what I can say is that the assumption that you mentioned is quite sensible. So is the volume of watches that the brand is selling per year. The integration will be very simple.
You know that now we have a division that is dedicated to watches and jewelry. So, Albert Bensoucaint will take care very closely of the integration of Illisnardere and that will become the backbone of our watches business. And indeed the integration of Elisnard will be quite beneficial to Jacques Perrigo and sewing in general particularly on the manufacturing side. About the acceleration for Gucci in the second quarter, I confirm what I've just said. And I think that Gucci will reach a growth that will be just below the growth rate you mentioned.
And as far as the month of July is concerned, we have seen a sequential improvement week after week. And that's why we are quite confident with also a very good reception for the new collection and a good order book for wholesale for the pre fall collection.
Good evening Tomas. Your question about FX, just as a reminder, what we can say is that the combination of FX and hedging gains outcome is not as favorable in H1 2014 as it was in H1 2013. For the fiscal year, we will not make any comments so far, but we expect hedging to be much less favorable in H2 this year compared to last year, especially regarding the evolution of oil fuel against other currencies in the last days. But of course, it may have a more favorable effect in terms of FX or on the sales. As regards your comment about and just as a reminder, still about the FX is about the hedging we have for the second half is closest to the spot rate.
So again, the hedging gain should be more limited during the second half. About the your question about the cash flow, you have a mixed effect as you see with some non cash items corresponding mainly to some the net gain on the from sale of asset and also variation on some deferred tax. And this variation on the deferred cash, deferred tax, of course, is without impact on the cash.
The sale of asset, what asset are you referring to?
We have sold some assets. I'm not talking about the sale of the real estate building because it's very the cash impact this in the semester. But the cash impact of some refurbishments and also is the sale of some the key money that we should receive in the coming months. But the main effect is mainly the variation of deferred tax to the different depreciation that we had in the semester.
Thank you.
We will now take our next question from Louise Singlehurst of Morgan Stanley. Please go ahead.
Hi, good afternoon, gentlemen. Three questions for me, 2 please. In terms of the Gucci brand, just looking at the retail development over Q1 and Q2, see a very nice improvement in North America, if you can give us any color on that. And for Asia, obviously, you and the peers have all been talking about a slowdown in Hong Kong and a tougher environment for Asia. Can you give us any reasons as to the rationale as to why that's happening do you think?
And how long you think this will persist? If there's any color on that? And then secondly, if you could just talk about the margins at Gucci brand, obviously, nice control there with the FX, but in terms of any cost savings that have been implemented in the period? And then finally just on terms of the new products we should expect at Gucci brand. You talked about the new bags and the encouraging signs you're seeing from the architecture.
Is the architecture now where you want it to be? And when we walk into the stores for fallwinter, would we start to see new selections coming through? Will it be quite obvious for us to pick out the new collections? Thanks.
Good evening, Ruiz. Concerning the improvement of Gucci in North America, I think it's totally consistent with the comments we made after the Q1. The Q1 had been particularly weak because of weather conditions. But as you will have noted with the release of the figures about the U. S.
Economy, the 2nd quarter was quite strong across the board in main cities with probably less volatility in the past. So overall, the performance of a good share division in the U. S, in the North America was very positive and at almost 10% in Retail during the Q2 and probably with less impact of the decrease of the Japanese units in Hawaii. Concerning Asia, it's as we mentioned, quite complicated for us to analyze and then to predict because we have much volatility on this market with very contrasted trends country by country. So what we can say is that we have some improvements on some markets which were more difficult in the past.
I think primarily to Korea where there is an improvement, same also to the fact that we have more the control of the distribution since the take back of the duty free. I would add also that we see progressive improvement in Mainland China and especially in Tier 1, thanks to the rationalization of the network in the country, but it's still ongoing. Hong Kong is quite tough and I think it was something that was mentioned already by our peers. And even if we saw an improvement during the Q2, the trends are still quite difficult due to a low level of traffic and an average basket, which is rather low at this stage. So there is a change also in terms of quality of the traffic.
And clearly, what dragged down the performance over the period and especially in the quarter are Taiwan and Singapore, which are very difficult markets. And without Singapore and Taiwan, the performance of Gucci will be positive in Retail in Asia. And as concerns the trends for the coming months, I must say that it's at this stage very difficult to predict and we don't see at this stage major signs of improvement. As regards the margin, what we can say is that we have lost 20 points of margin if you look at reported data that you have an improvement in constant currency. It's mainly due that due to the size of Gucci, we have a good absorption of the fixed cost and we have decided to have a tight control of the operating cost except on the store expenses where we believe that we must invest and also in terms of communication where we try to push also the communication around the new collections you mentioned.
So these are the lines where we have decided to increase. But otherwise, we have the tight policy of control of the cost. And going forward, we can anticipate that over the year, the strength we saw during the first half should be confirmed over the year as regards the EBIT profitability of Gucci. I just would add something about Asia to concerning this situation I mentioned. I think that considering the trend, we are very confident that having new managers on board in most Asian countries and soon in China, we could also address more properly this complex situation in Asia.
Concerning the new products. So handbags and women ready to wear, we have a categories where we did expect a strong improvement in the performance, thanks to the new fall winter 2014 collection. But as you know, we are talking of a gradual ramp up for this new collection with above our sales rather expected during H2. So Swingline was the first to be delivered, representing a functional and entry level bag. Bright buyers to these novelties.
Vis a vis the now established bamboo shopper last year when it was introduced, we see that Bright Gamante has performed very well and now exceeding bamboo shopper in both quantity and value. So globally just coming back to the slide I commented about the assortment of Gucci, what we can say is that in the handbags category, we are more or less satisfied now about where we stand in terms of share between logo, non logo, leather and non leather. We have still some, of course, ramp up to make in Asia Pacific. But globally, in terms of merchandising for the handbag category, representing 1 third of the sales, we are very happy with the assortment we have.
Thank you. One follow-up. Just in terms of Western Europe, can you just tell us if there's any change in trends in Chinese spending? You talked about lower baskets or lower kind of mix in Hong Kong. Are you seeing that in terms of spending behavior in Europe from the Chinese as well?
What we see first is, of course, the impact of or the decline still of the Japanese tourists and the Russian tourists. It's fair to say that as regards the Chinese, we saw a slowdown in terms of sales to Chinese tourists, which is more an impact due to the traffic than on the average ticket.
Super. Thank you.
We will now take our next question from Luka Solca of Exane BNP Paribas. Please go
ahead. Yes. Hello. Luca Solca from Exane BNP Paribas. There seem to be quite a number of moving parts as far as Chinese tourists are concerned.
They seem to be going more to Korea and Japan. They seem to be going less to Southeast Asia. There seem to be some softness in Europe. I wonder if you could help us understand these trends better by sharing what you see from your viewpoint and where you see Chinese tourists moving in the 6 months that just went by. As a second point, the Gucci repositioning is impressive.
I wonder what your thinking is in the accessible price handbags considering the very significant momentum of some of the peer brands operating in that space? And if you still have an ambition to play a role in that space in the future, knowing that your brands, the brands you currently have in your portfolio have moved largely out of that space. Maybe if you could confirm, I seem to understand that you have now found a CEO for Gucci in China. And if you could confirm that this is the case and when he or she will be getting on board? And lastly, if I may, I would be interested in getting your latest thinking as far as the benefits and the positives combining the luxury business and the lifestyle business within Kering and what you feel about this at this current stage?
Thanks very
much. Thanks, Luca, for your questions and especially for the first one because at this stage probably too early to assess in the long run what would be the behavior of the more the wealthiest Chinese customers. So what we know at this stage is that they are buying less in Hong Kong. They are buying less in Southeast Asia. And they are buying probably more as you mentioned in Korea and Japan, but mostly probably in Europe in the main cities in Europe.
But I think it's very difficult to gauge this precisely concerning also that the consumption environment with the Chinese customers is still quite muted. What is fair also is to consider that in Hong Kong besides the decline of traffic as I mentioned and perhaps due to the regulation on the tour operator, perhaps we have also some impacts. We have also the impacts of a less qualitative traffic in Hong Kong. So I think at this stage, it's very, very hard to say that. But I think one of the impacts we see on the high luxury side in Hong Kong is partly driven by the fact that the West Coast Chinese are buying not anymore in Hong Kong.
Concerning the handbags, I think it's we made it very clear that the strategy was not to tap again or to come back to the more affordable segment. And I think that now as presented in the slide, we have the assortment in terms of price points and styles. We want to have in the handbag category. So there is no plan to launch some handbags with a lower entry price. We would rather And I think that one of the demonstration of this is the of the And I think that one of the demonstration of this is very solid increase of sales in some categories like the teal, the silk and also the shoes.
And this is the way we can address more our operational customers. So no plan at this stage to come back in the more affordable segment in handbags. Jean Francois?
Regarding the CEO in China, we are in the final phase of appointment. And now about the combination of luxury brands together with sport and lifestyle brands within our group, I think that we are in the same situation as the Volkswagen Group for instance, which combines CEAT together with Bentley. So they manufacture cars, but they have luxury cars on the one side and I would say enterprise cars on the other side. So in our group, we have brands that share the same value chain and with different differences in the magnitude of those various elements. But indeed, this is the same value chain.
Also what we have implemented gradually is some sharing of experiences and know how, particularly in merchandising, also design, also fabrics. For instance, we have in Milan, we have a material innovation lab, which analyzes and experiment new fabrics with a specific focus on sustainability. And this is primarily meant for luxury, but also it is used by our sport and lifestyle brands. So that's why that we in fact our sport and lifestyle brands do benefit from the presence of the luxury brands together with them in the group.
Perfect. Thank you very much indeed. Just for clarity's sake, when I was thinking about accessible priced handbags, I wasn't implying that you could go back to that space with your own brands. But I was just wondering, well, there could be an interest down the road in acquiring an M and A of brands in that space if at all. Although I understand that this is probably not the case.
That's not the case. Absolutely. Okay.
Thanks very much indeed. Thank
you. Thank you. Hello?
We will now take our next question from John Guy of Berenberg. Please go ahead.
Thanks very much. Good evening, gentlemen. A few questions for me, please. Jean Francois, could you just confirm, I think you mentioned in the second half for Gucci your expectations of growth around I think 4% to 6%. I just wanted to clarify that that was for the second half or what you're seeing so far within the Q3.
Certainly with regards to the comp base in the second half, it's significantly softer. And I think you mentioned this gradual trend rolling through into the second half of a more normalized wholesale environment. So you should see a pretty strong technical uplift from those two drivers notwithstanding any improvement within the retail division. So if you are talking about 4% to 6% that still seems reasonably light within that backdrop. So I just wanted to confirm that.
My second question was with regards to the number of outstanding retail stores at Gucci you have outside the Frida format, the Frida 1 format and your expectation and time line around having all of those done in a consistent format? My third question is just around Gucci's bag price mix evolution in the second quarter. I think there were comments around the Q1 talking about a mid teens price mix uplift and I wanted just to check that that was running consistently into the second quarter. And also what you expect to see within your accessories line?
I think that this is an
area where we see across your accessories. So the scale of the opportunity there, it's across your accessories. So the scale of the opportunity there please. Thank you very much.
Okay. So I can't confirm that the bracket of growth rate that I mentioned was meant for the second half of this year.
Regarding the store footprint and the implementation of the free deck handset as of the end of H1, 58% of Gucci store network was carrying the new store concept. 10 stores have been refurbished under the new format during the 2nd quarter and 'eighteen during the first half. So by year end 2014, it is expected that 63% of the store network will carry the new format, bringing the total number of referred to approximately 40 refurbishments over the year. And again, just as a reminder, when we talk about Frida Concept, of course, this concept can also evolve a little bit to address certain feedback we can have from the customers and especially some local specificities we need to address. Regarding the price or the price evolution of the handbags and most of the product Gucci products, what we can say is, of course, as you perfectly know, part of the average price increase in the past was driven mainly by product mix, 2 third of this and 1 third due to your pure price increase.
So at the beginning of Q2 2014, which started introducing the fallwinter 2014 collection for which no pure price increases have been applied. So Gucci main objective for this previous season. So and what we see is more price increases in the luggage category, also in the small leather goods category, where we are making the efforts to upgrade the brand and also to have a more balanced offer between logo and non logo as we did in the past in handbags. So what I expect for the handbags is a softer evolution in terms of average price and more an effort put on the other categories and especially the smaller boots and luggage.
Okay. Great. And just to I guess develop your comments around the Frida concept. Is that with reference to I 80 stores where you've got a slightly differentiated merchandising offering at the moment in terms of trialing different formats within the Frida concept? And maybe could you just comment around how that's evolving and if you're going to continue to actually roll that out?
And if I could just ask one more just around Hong Kong and the weakness that you're seeing. Has any of this got to do with and I know it's very difficult to try and quantify this relatively early stage, but do you think there's any significant weakness on the back of occupier at the moment, which seems to certainly have a or have had a relatively negative impact from a wholesale sort of sell in perspective? Thanks.
Concerning the Frieda concept, we must make the distinction between the complete store concept and perhaps the use of different fabrics or the use of different materials within the store. And when I mentioned the evolution was more about the fact that we tried also to fine tune the concept country by country or region by region, introducing some new colors or type of foods, but still under the Frida concept. What you mentioned and you're referring to is more about the visual display and fact that we had made different clusters of stores in order to address properly the specific clientele of the store. We have a program that was set up by the merchandising centrally at Gucci to have a dedicated visual display season after season or period after period to clearly address the client's expectations and we must say that we are quite happy with the development of that concept of very dedicated visual display and it was introduced at the time of the Gradient introduction. So, so far so good, I would say, concerning this principle of a specific Visual Display.
Concerning the question about Hong Kong, I think it's very difficult, as you mentioned, to know exactly at this stage. It's probably too early. I think that clearly, we have a global economical and political environment that puts some pressure on Hong Kong. But we will see I think we will be in a position to analyze this more precisely in the coming weeks.
Fantastic. Many thanks.
And we will now take our next question from Anton Belge of HSBC. Please go ahead.
Yes. Good evening, Anton Belge of HSBC. A couple of questions. So, second on the acquisition of Narda, could you provide the EBITDA number on which you based your 30 times multiple, please? And maybe share with us some kind of sales evolution over the last, I don't know, 3 or 5 years.
Has it been a brand that had growth all along or went through soft patches or whatever? And second question relates to your expectation of 4% to 6% increase at Gucci. Can you explain what type of expectation you've got for wholesale? Because if I remember correctly, I think earlier in the year, you said that wholesale over the full year would be down low single digits and it was already down 16% in the first half. So does it mean that you're expecting actually wholesale to be positive over the full year?
And my third question relates actually to Sergio Rossi. It's not the first time yet you mentioned that Sergio Rossi is below your own expectation. So can you what are the issues at Cergyo Rossi? And since, again it's been you've been complaining about the brand for quite a while, what's the rationale for keeping the brand within your portfolio? Amelie, so if you could mention if your stake in Puma was changed in the first half?
Thank you.
Okay. So the multiple I mentioned applies to the EBITDA of 2013, but we do not disclose the figure. And also in my speech, I mentioned that it is now then enjoyed sound growth in the past years with the particularly with the launch of new product very innovative particularly based on Silicium. And again, I think that we have in our pipeline new innovation for the for at least 4 years to come, which make us confident that we will post growth for this
plant. I will come back to the different comments I heard or the questions I heard about the trends for H2. So to remind that the negative wholesale trend in Q1 and Q2 encompasses a comparison basis in H1, twenty thirteen that still included some accounts now closed in Europe as well as a lot of operations that have been brought back in Q2, Q3 and Q1 this year like Korea, Canada, Russia. So mechanically, the trend is poised to improve gradually quarter after quarter provided we do not we don't selectively and opportunistically contemplate any further buyback opportunity in the coming quarters. So at the end of the day, probably for the second half, the trend in wholesale should be more or less flattish.
Concerning globally the trends for H2 globally, As you know, we never provide formal quantified guidance. Moreover, it's hard to predict if consumers move and macroeconomic environment will improve in some regions. This being said and coming back to all the comments we made about the collections and all the initiatives taken with the new managers in Asia, we are confident that Gucci can deliver in H2 a positive comparable growth, but it's a realistic at this stage to expect this growth. It's realistic rather to expect this growth to be low single digit and especially with an improvement focused on the Q4 of the H2.
Sorry, I'm getting slightly disturbed. So it's not 4% to 6%, but it's low single digits?
No. I'm talking about the positive comparable growth on the like for like business. So if you have the impact of the expansion of the stores in mainly the impact of the openings in 20 13, which are less comparable, then you reach the amount mentioned by Jean Francois.
Okay. So which means that in retail actually you would be closer to 6 to 8?
Yes. Okay. I just want to emphasize that I didn't mention this figure. It was Thomas who mentioned this figure. And I confirm that this figure was sensible, but this is as you know, we never give any type of guidance.
So
it's not our figure. This is only something that we guided on your figures. Okay. Coming back to Sergio Rossi, indeed we face issues both from a revenue perspective, but also a profitability perspective. And we are quite determined to take actions in a very wide range of options.
So and this is something that we are we have been addressing and we will continue to do in the coming months. And as to Puma, the share in Puma's talk has not changed.
Okay. Maybe sorry on Louis Lardan, but you have to understand that we have to understand that you don't want to give the acquisition price. But in terms of profitability, was the EBITDA margin around 10,000, 15, 20, I mean some kind of broad estimates would be welcome. Thank you.
I would say that it's a margin that is comparable to the best in class in this industry.
Thank you.
Thank you. We will now take our next question from Paul Finan with Morgan. Please go ahead.
Good evening and thank you for taking my question. I noticed you mentioned that the men's business was a driver at several of the brands. Could you comment broadly on what the drivers were and give us some color? And also could you comment, is it a driver in most of the brands and most of the regions? And or was it just mentioned that the 2 brands, I think it was Bottega and Saint Laurent?
This is first of all, that in the emerging countries, the balance between male shoppers and female shoppers is not totally comparable to the one we have in the more mature countries. So one of the driver was clearly the way of the men in the emerging countries buying some luxury goods. Also we see an increase of the male buyers in the more mature countries, especially are penetrating the U. S. We have more and more men's buyers.
So at the end of the day, this is clearly a category performing very well in mostly all the regions and also in all the brands. So we mentioned Bottega Veneta and Saint Laurent because this category was probably underdeveloped. So this is we're there that we see the most impressive expansion. But we can say that globally that's true also at Gucci level. In all brands, we have an increase of the sales in the men's category.
So since it's underdeveloped longer term, you see it as a greater percentage of the business keep continuing to grow?
Absolutely. Absolutely. This is an opportunity to save for almost all our brands. And clearly, the development of Potega Veneta in the U. S, we have already mentioned will be partly driven also by the men's category, whether in the shoe category or in the ready to wear category.
So we have many initiatives in almost all the brands to push this men's category. 1 of the most iconic brand in that category is McQueen, in which we have the main category performing very well now for years that we can still develop. And again, at Balenciaga, this is also a category which could be further developed, so especially in the sneakers and in the shoes. So we are working on this. And that's the reason why we had opened a men's boutique in New York in Mercer Street dedicated to the men's category.
Interesting. Thank you very much and best of luck.
Thank you. And finally, we will take our last question from Hermine De Bensman of Raymond James. Please go ahead. Hi, good evening. I have three quick questions please.
The first one on Gucci. Can you give us the weight of the Chinese and Japanese clientele in H1? The second opening are you planning for main luxury brand in H2? And lastly, what kind of tax rate can we expect in full year?
For Gucci, the Chinese customer globally, so on the in Mainland China or with the tourists. The Mainland Chinese representing 34% of the sales of Gucci and 36% at Bottega. And if you add the other Chinese, it's you had 3% at Gucci and 9% at Bottega Venator. And the Japanese are representing something like 11% at Gucci and 17% in Bottega Veneta. So this is the share of the Chinese and Japanese with the 2 main brands.
Of course, our other brands are less exposed at this stage of their development to the Asian clientele, except of course Saint Laurent, which is a brand very demanded and which is very hot in Japan for many years. And now Saint Laurent is developing very well in China with a very rapid expansion and it's partly the explanation also of the growth of the brand this year. As regards to store openings, we as you will have noticed, we have rather consolidated our store footprint during the H1. I would mention that to precise that at Gucci, we have, for example, the impact of the 5 stores put back in Russia plus some openings of new corners for Gucci Watches. So small corners.
So at the end of the day, it's rather a decline in terms of number of stores at Gucci. And we have no plan to speed up or to have a higher pace of store openings during the H2. And the pattern that we have in the H1 in terms of store openings should be more or less the same during the H2. So rather stabilization this year, and it's partly also the rationale for keeping the CapEx more or less the CapEx budgets more or less at the same level with reallocation of the CapEx to the refurbishment, including at Saint Laurent after a year of massive investments last year in store openings, we are focused more on the refurbishments. Concerning the tax rate, I think that you should look primarily to the recurring tax rate, which is the most representative one because you have an impact this semester due to the net gain in connection with the sale of the building in New York.
So the recurring tax rate is, I think, a good indication of what is the average tax rate of the group for now several quarters or several semesters. So we don't anticipate major changes in terms of tax rate for the second half.
Thank you very much.
All right. Thank you all for participating to this call. Claire and Edouard are available to answer any questions you may still have. We will talk again at the end of October for the release of our Q3 sales figures. And in the meantime, I wish you a good evening and a great summer.
Good night. Thank you. Bye.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.